The new FTSE Cap 100 5 per cent Index and the FTSE Cap All-Share 5 per cent Index have the same constituents as the standard FTSE 100 and FTSE All-Share indices but with weightings capped at 5 per cent.
The launch of the new indices has taken on added significance with Shell’s weighting in the All-Share likely to rise from 3 per cent to over 7 per cent in July once a unified listing in London with Royal Dutch is approved. The resources sector will then also account for 21 per cent of the index - compared with 10 per cent for the FTSE World Index.
Bernard Nelson, European principal at Mercer Investment Consulting, said: “Trustees can offset the effect of the concentration by reducing UK equity exposure and allocating more funds to international equity markets. Another solution would be to cap the size of individual stocks in the UK equity market. Adopting as a benchmark the FTSE All-Share Index with a 5 per cent cap on individual stocks strikes a balance between dealing with stock concentration and not being too disruptive to the underlying investment portfolio.”
With some 700 stocks making up the FTSE All-Share and the bulk of UK equity portfolios managed on behalf of UK pension schemes benchmarked against it, the top five stocks make up more than 30 per cent of the entire index’s market capitalisation.
Ed Burke, fund manager for Invesco Perpetual, commented: “The fund management industry has become too reliant on the index for portfolio construction. With a couple of stocks in a couple of industries accounting for a large part of the market, the investment risks for the majority of managed assets has become extremely concentrated.
“We believe that investing is about making decisions on whether a stock is undervalued over the longer term and do not believe investing in a stock because it is large in the index adds value to investors.”
RA
